[Federal Register Volume 84, Number 194 (Monday, October 7, 2019)]
[Rules and Regulations]
[Pages 53303-53308]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-20822]
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Rules and Regulations
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
under 50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by the Superintendent of Documents.
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Federal Register / Vol. 84, No. 194 / Monday, October 7, 2019 / Rules
and Regulations
[[Page 53303]]
NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 715
RIN 3133-AE91
Supervisory Committee Audits and Verifications
AGENCY: National Credit Union Administration (NCUA).
ACTION: Final rule.
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SUMMARY: The NCUA Board (Board) is amending its regulations governing
the responsibilities of a federally insured credit union (FICU) to
obtain an annual supervisory committee audit of the credit union. The
final rule implements recommendations outlined in the agency's
Regulatory Reform Task Force's Regulatory Reform Agenda (Agenda) and
will provide additional flexibility to FICUs. Specifically, the Board
is: Replacing the Supervisory Committee Guide with a simplified
appendix to the part; eliminating two audit types that FICUs seldom
use; and eliminating a specific deadline for outside, compensated
persons to deliver written audit reports to FICUs.
DATES: The final rule takes effect January 6, 2020.
FOR FURTHER INFORMATION CONTACT: Technical information: Alison Clark,
Chief Accountant, Office of Examination and Insurance, at the above
address or telephone (703) 518-6611; or Legal information: Marvin Shaw,
Staff Attorney, Office of General Counsel, at the above address or
telephone (703) 518-6553.
SUPPLEMENTARY INFORMATION:
I. Background and Legal Authority
A. NCUA Regulatory Reform Task Force
In August 2017, the Board published and sought comment on the
Regulatory Reform Agenda.\1\ The Agenda identifies those regulations
the Board intends to amend or repeal because they are outdated,
ineffective, or excessively burdensome.\2\
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\1\ 82 FR 39702 (Aug. 22, 2017).
\2\ This is consistent with the spirit of President Trump's
regulatory reform agenda and Executive Order 13777. Although the
NCUA, as an independent agency, is not required to comply with
Executive Order 13777, the Board has chosen to comply with it in
spirit and has reviewed all of the NCUA's regulations to that end.
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The Agenda addresses the NCUA's regulations on Supervisory
Committee Audits. As discussed more fully below, the Agenda recommends
removing from Sec. 715.7 of the NCUA's regulations the reference to
the ``NCUA's Supervisory Committee Guide'' and amending the requirement
related to the timing for delivery of written audit reports issued by
outside, compensated persons in Sec. 715.9 of the NCUA's regulations.
B. Federal Credit Union Act Audit Requirements
Sections 115 and 202(a)(6) of the Federal Credit Union Act (FCU
Act) set forth provisions addressing auditing and accounting
requirements.\3\ Section 115 of the FCU Act requires a federal credit
union's (FCU's) supervisory committee to make an annual audit and
submit a report of that audit to the FCU's board of directors and a
summary of that report to the FCU's members at the next annual
meeting.\4\ Further, the supervisory committee is required to make
supplemental reports as it deems necessary.
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\3\ 12 U.S.C. 1761d; 12 U.S.C. 1782.
\4\ 12 U.S.C. 1761d.
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Section 202(a)(6)(A) of the FCU Act is a general grant of authority
to the Board to prescribe audit standards that require an outside,
independent audit by a certified public accountant for any fiscal year
for which a FICU has not conducted an annual supervisory committee
audit, has not received a complete and satisfactory supervisory
committee audit, or during which the FICU has experienced persistent or
serious record keeping deficiencies.
Section 202(a)(6)(C) of the FCU Act generally requires FICUs having
assets of $10 million or more to use accounting principles consistent
with generally accepted accounting principles (GAAP) in all reports or
statements required to be filed with the Board.\5\ The Board, and state
credit union supervisors under applicable state law, may require credit
unions having less than $10 million in assets to follow GAAP.\6\
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\5\ 12 U.S.C. 1782(a)(6)(C). In lieu of GAAP, the NCUA Board
``may prescribe an accounting principle . . . that is no less
stringent than [GAAP].''
\6\ Id.
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Section 202(a)(6)(D) of the FCU Act imposes audit requirements for
larger FICUs. Specifically, a FICU having assets of $500 million or
more is required to obtain an annual independent audit of its financial
statements performed in accordance with generally accepted auditing
standards, hereafter referred to as a ``financial statement audit.''
That audit must be performed by an independent certified public
accountant or public accountant licensed to do so by an appropriate
state or jurisdiction.\7\
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\7\ 12 U.S.C. 1782(a)(6)(D)(i).
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Additionally, if an FCU having total assets of less than $500
million but more than $10 million elects to obtain a financial
statement audit, the audit must be performed consistent with the
accountancy laws of the appropriate state or jurisdiction.\8\
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\8\ 12 U.S.C. 1782(a)(6)(D)(ii).
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C. The NCUA's Supervisory Committee Audit Regulations
Currently, Sec. Sec. 715.5 and 715.6 of the NCUA's regulations
specify: (1) The minimum type of annual audit a FICU is required to
obtain according to its charter type and asset size; (2) the licensing
requirements of persons performing certain audits; and (3) the auditing
principles that apply to certain audits.\9\ These provisions were last
updated in July 1999.\10\ The July 1999 rulemaking adopted Sec. 715.7
of the NCUA's regulations, which outlines the options for a FICU to
comply with the annual audit requirement, if it has elected not to
voluntarily obtain a financial statement audit. The options currently
permitted include a FICU obtaining: (1) A Balance Sheet Audit; (2) a
Report on Examination of Internal Controls over Call Reporting; or (3)
an Audit per the Supervisory Committee Guide. The first two options are
analogous to options that the Federal Financial Institutions
Examination Council adopted in 1999 for other federally insured
financial institutions. Regarding the third option, the NCUA amended
the Supervisory Committee Guide in 1999 to detail the minimum scope and
procedures for engaging
[[Page 53304]]
outside, compensated professionals in the audit process and to clearly
distinguish a Supervisory Committee Guide audit from a financial
statement audit. The Supervisory Committee Guide is not included in the
NCUA's regulations and instead is available on the agency's website.
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\9\ 12 CFR part 715.
\10\ 64 FR 41035 (July 29, 1999).
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II. Proposed Amendments
In February 2019 (84 FR 5957), the Board issued a notice of
proposed rulemaking (proposal) amending part 715 to: (1) Eliminate the
Report on Examination of Internal Controls over Call Reporting option
in Sec. 715.7(b); (2) remove reference to the NCUA's Supervisory
Committee Guide in Sec. 715.7(c) and replace it with minimum
requirements set forth in a new appendix A to part 715; (3) eliminate
the Balance Sheet Audit option in Sec. 715.7(a); and (4) amend Sec.
715.9(c)(6) applicable to engagement letters with outside auditors to
eliminate a specific 120-day timing requirement.
The proposal also sought comments on whether to include additional
topics in the new proposed appendix A. Specifically, under the proposed
appendix A, the supervisory committee, internal auditor, or other
qualified person would be required to perform and document the
following areas of review:
Test and confirm material asset and liability accounts,
including, at a minimum, loans, cash, investments, shares and
borrowings;
test material equity, income and expense accounts;
review key internal controls, including, at a minimum,
bank reconciliation procedures, cash controls, dormant account
controls, wire and ACH transfer controls, loan approval and
disbursement procedures, and controls over insider \11\ accounts;
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\11\ ``Insider'' refers to employees and officials of the credit
union.
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test the mathematical accuracy of the allowance for loan
and lease loss accounts and ensure the methodology is properly applied;
and
test loan delinquency and charge-offs.
As reflected in the text of the proposed appendix A, the
supervisory committee or other person conducting the audit would be
expected to determine whether to supplement the minimum procedures in
light of a particular FICU's circumstances.
In the proposal, the Board noted that in selecting these areas of
review for inclusion in appendix A, NCUA staff borrowed substantially
from the Supervisory Committee Guide, reviewed and adopted procedures
established by the American Institute of Certified Public Accountants,
and consulted with accounting professionals. The goal of the proposal
was to make the requirements more understandable to FICUs, rather than
change the areas of review the Board considers important. Nevertheless,
the Board requested comment on whether other areas of review should be
included in appendix A, and listed the following examples: Loans to
insiders, pay and benefits to employees and board members, regulatory
compliance, and compliance with the Bank Secrecy Act.
In the proposal, the Board noted its plan to decommission the
outdated Supervisory Committee Guide, stating that the NCUA would issue
reference materials on how to conduct procedures that would meet the
minimum requirements of appendix A. This reference material could be
used by supervisory committees and the third parties hired to develop
agreed upon procedures. Alternatively, supervisory committees and hired
third parties could elect to incorporate other agreed upon procedures,
so long as the testing meets the minimum requirements.
III. Comments
The Board received 22 comments from credit unions, credit union
trade associations, credit union leagues, an association of state
regulators, and accountants and accounting firms. Commenters generally
supported the proposed rule and the Board's objectives. The consensus
was that the proposal would provide FICUs with assets less than $500
million with additional flexibility, reduce compliance burdens, and
simplify the Supervisory Committee Audit, while still providing useful
information about the financial health and stability of FICUs.
Nevertheless, some commenters objected to specific provisions or
proposals, while others provided additional suggestions that they
believed would improve the proposal and avoid adversely affecting small
FICUs. Specifically, a few commenters cautioned that some provisions
might increase cost and burden for smaller FICUs and thus run counter
to the intent of the proposal. Substantive comments supporting or
opposing each specific proposal and advocating alternatives or
modifications are discussed below. As discussed in detail below, the
Board is adopting the proposal with a few minor modifications.
IV. Final Rule
As detailed below, in this final rule, the Board is amending part
715, Supervisory Committee Audits and Verifications, by adopting the
proposal with a few minor modifications. The final rule updates
outdated provisions and provides added flexibility to FICUs with assets
less than $500 million while continuing to ensure appropriate financial
oversight. The final rule includes the following modifications to part
715: (1) Eliminating the Report on Examination of Internal Controls
Over Call Reporting in Sec. 715.7(b); (2) removing the Supervisory
Committee Guide Audit Alternative to a Financial Statement Audit in
Sec. 715.7 and replacing it with an appendix; \12\ (3) eliminating the
Balance Sheet Audit option in Sec. 715.7(a); and (4) removing the 120-
day report delivery deadline in Sec. 715.9(c)(6) from the required
terms for audit engagement letters with outside, compensated persons.
The Board is also making conforming amendments to part 715 to reflect
the replacement of the Supervisory Committee Guide with the appendix.
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\12\ In the final rule, the Board will no longer reference the
``appendix'' as ``appendix A.'' The reason for this modification is
to avoid confusion with appendix A of the Supervisory Committee
Guide.
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A. Eliminate Report on Examination of Internal Controls Over Call
Reporting in Sec. 715.7(b)
The Board proposed eliminating the option for FICUs with assets
less than $500 million to obtain a Report on Examination of Internal
Controls Over Call Reporting as one of the alternatives to a financial
statement audit. The proposal noted that less than one percent of FICUs
use this option to fulfill their audit requirement.
Commenters generally agreed with the proposal because of this
option's limited use and lack of review of a FICU's income statement.
One commenter favored retaining this option to maintain flexibility for
smaller FICUs. As proposed, the Board is eliminating this option
because it advances the purpose of eliminating outdated and ineffective
regulations. This audit option is seldom used and provides limited
insight into a FICU's financial condition.
B. Eliminate the Supervisory Committee Guide Audit Alternative to a
Financial Statement Audit in Sec. 715.7 and Replace It With an
Appendix
The Board proposed removing reference to the NCUA's Supervisory
Committee Guide in Sec. 715.7(c) and replacing it with a new appendix
covering minimum supervisory committee audit requirements. The Board
described the 350-page Supervisory Committee Guide as
[[Page 53305]]
outdated. In lieu of this option, the Board proposed adding an appendix
to part 715 to set forth minimum areas of review in a clear, concise
manner.
Comments on this part of the proposal addressed two areas: (1)
Replacing the Supervisory Committee Guide with the appendix generally;
and (2) the specific areas of review set forth in the appendix. The
Board discusses these areas separately, below.
i. General Comments on Replacing the Supervisory Committee Guide
Although a few commenters supported retaining the Supervisory
Committee Guide, most supported replacing it with the appendix. The
commenters supporting the change stated that it would clarify and
simplify audits for FICUs with assets less than $500 million, increase
flexibility, save time and resources, and replace the outdated
Supervisory Committee Guide, among other advantages. These commenters
also stated that the appendix would increase flexibility and allow
FICUs to focus on major risk areas.
The few commenters that opposed adopting the appendix opined that
it would create additional costs and unintended consequences, such as
increased audit work and associated fees for FICUs that hire outside
auditors. These commenters stated that costs would increase
significantly, but they did not attempt to quantify the claimed
increase in costs. One commenter made several suggested edits to the
appendix to alleviate the negative economic impact that the commenter
asserted the appendix would cause.
After reviewing and analyzing the comments, the Board has
determined that it is appropriate to remove the Supervisory Committee
Guide alternative to a financial statement audit in Sec. 715.7 and
replace it with an appendix. As stated in the proposal, the Board finds
the Supervisory Committee Guide outdated and that the minimum areas of
review should be incorporated into the regulation. The NCUA will
replace the Supervisory Committee Guide with reference materials on
audit procedures to aid in performing the areas of review in the
appendix. Replacing the Supervisory Committee Guide with new reference
materials on audit procedures will provide an up-to-date resource and
greater flexibility for FICUs. The Board finds that the appendix will
provide specific areas of review while covering an appropriate range of
financial matters. Adding prescriptive provisions to the appendix would
run counter to the Board's intention to simplify the requirements and
afford flexibility to FICUs. In recognition of the concerns that a few
commenters raised, the agency will monitor the implementation of the
appendix and may issue informal guidance to address questions that
arise. In addition, as the Board stated in the proposal, the agency
will consult with representatives of the accounting profession and
publish reference materials on audit procedures to aid FICUs and others
in conducting audits under the appendix. The Board believes that these
measures will effectively address any initial questions or concerns
that may arise during the transition from the Supervisory Committee
Guide to the appendix.
Separately, despite supporting adoption of the appendix, a few
commenters stated that it would be worthwhile to retain the Supervisory
Committee Guide as a guidance document on the NCUA website for smaller
FICUs. These commenters suggested adding a disclaimer to the document
to note that its procedures would no longer satisfy part 715.
The Board has determined that it is appropriate to retain the
Supervisory Committee Guide for historical reference on the NCUA
website, with the appropriate disclaimers. However, because the
Supervisory Committee Guide is outdated, FICUs should not rely on the
Guide as a means to comply with part 715.
ii. Comments Addressing the Appendix
The appendix sets forth specific areas of review, as discussed
above. The appendix also provides that parties conducting audits may
need to perform additional procedures based on the circumstances of a
particular FICU, and that the supervisory committee must apply its
judgment in determining the procedures necessary to meet audit
requirements.
The Board requested comments on whether the proposed minimum
procedures and topics in the appendix are appropriate, and whether
there are any additional topics that should be included. To this end,
the Board listed several specific topics that it was considering adding
to the appendix.
One commenter expressed concern that the objectives of the
supervisory audit would not be met by the proposed appendix. This
commenter suggested incorporating several procedures into the appendix
that the commenter believed would result in assurance that the balance
sheet accounts are fairly stated, including reconciliations,
verifications, and a review of board minutes.
The Board has determined that the minimum areas of review set forth
in the proposed appendix are appropriate. These areas of review are
intended to reflect common industry practices for auditing accounts and
controls over financial institution financial statements. Incorporating
extensive additional detail into the appendix would run counter to the
Board's goal of clarifying and simplifying audit procedures for FICUs
with assets less than $500 million. The Board further notes that NCUA
is considering recommendations received on the audit procedures for
incorporation into the reference materials that the agency will make
available after this final rule goes into effect, as the Board stated
in the proposal.
As noted above, the Board also requested comments on whether the
topics in the appendix are appropriate and whether there are any
additional topics that should be included. The Board specifically
requested comment on including the following additional topics in the
appendix: loans to insiders; pay and benefits to employees and board
members; regulatory compliance; and compliance with the Bank Secrecy
Act.
Most commenters agreed with the list of topics expressly set forth
in the appendix, stating that the proposed areas of review in the
appendix sufficiently ensure that a proper audit would be conducted.
However, several commenters recommended not including the additional
topics on which the Board sought comments. As detailed below, the Board
has decided to adopt the text of the appendix as proposed, with the
addition of reviewing board minutes and testing for unrecorded
liabilities. The Board has decided to not add any other topics.
Several commenters objected to including employee and board
compensation as an audit topic in the appendix. They stated generally
that this topic does not fit the intent of a supervisory committee
audit and instead is within the purview of the board of directors. Some
commenters also objected because they perceived no clear safety and
soundness basis to include this topic. The Board notes that while it is
not an express provision in the appendix, the supervisory committee
audit must test employee and board compensation when it is a
significant component of a FICU's expenses--as the regulation requires
the audit to include a test of ``material equity, income, and expense
accounts.'' However, the Board emphasizes that the purpose of the
supervisory committee audit is to reconcile the mathematical
[[Page 53306]]
computations related to compensation, and whether they are consistent
with authorized compensation plans, but not to judge the
appropriateness of the level of compensation. Confirming the accuracy
of these figures and flagging any irregularities will serve the goal of
ensuring safety and soundness.
Several commenters stated that the appendix should not require
testing for Bank Secrecy Act and Anti-Money Laundering as part of the
audit engagement, noting that it would be redundant of part 748, which
requires annual testing in this area.\13\ The Board agrees with these
commenters and has decided not to include this topic in the appendix.
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\13\ 12 CFR 748.2.
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Also, several commenters stated that the topics should not include
``regulatory compliance.'' They noted that regulatory compliance issues
are beyond the scope of a supervisory committee audit, which focuses on
financial and accounting issues. The Board agrees with commenters that
it would likely be duplicative of other legal and regulatory
requirements to incorporate regulatory compliance in the appendix.
Accordingly, the Board has decided not to add this topic to the
appendix.
In addition, a few commenters recommended adding to the list of
topics. The suggested areas included testing for unrecorded and/or
unstated liabilities that would not otherwise be subject to testing
based on the materiality definition described in the proposal. Another
commenter recommended that the appendix include these topics: disaster
recovery and business continuity plans, information security, and
vendor management.
The Board agrees that the areas of review should include testing
for unrecorded liabilities. However, the Board declines to add the
other recommended topics because they are not customarily part of a
supervisory committee audit and would be covered by separate
engagements. Specifically, the Board has determined not to add disaster
recovery and business continuity plans, information security, and
vendor management.
In sum, the Board is adopting the appendix as proposed, with the
addition of reviewing board minutes and testing for unrecorded
liabilities.
C. Eliminate the Balance Sheet Audit Option in Sec. 715.7(a)
The proposal sought comments on whether to eliminate the Balance
Sheet Audit option for FICUs with assets less than $500 million. This
audit does not cover a FICU's income statement.
Several commenters stated that this option provides no benefit
because the balance sheet does not reflect the current value of assets.
Commenters also noted that the other audit alternatives provide better
indicators of a FICU's financial health.
A few commenters favored retaining this option, despite
acknowledging its limitations. For example, some commenters suggested
that this option may be effective in the limited circumstance when a
credit union is transitioning from a supervisory committee audit to a
financial statement audit. Another commenter stated that this option
provides reasonable assurance that the balance sheet complies with GAAP
and is a viable, lower-cost option than a financial statement audit.
The Board has determined that the balance sheet audit does not
provide sufficient information to allow a FICU's board of directors to
assess the FICU's financial health. Because a supervisory committee
audit provides greater insight at reasonable costs, the Board has
decided to eliminate the Balance Sheet Audit as a means to comply with
part 715.
D. Assistance From Outside, Compensated Person--Timing Requirement
The Board also proposed amending Sec. 715.9(c)(6) to eliminate a
prescriptive timing requirement for completion of audits by an outside,
compensated person. This section, among other things, addresses
engagement letters a FICU may use to hire a compensated auditor. The
current regulation requires that an engagement letter specify a target
date of delivery of written audit reports ``not to exceed 120 days from
the date of calendar or fiscal year-end under audit (period covered).''
\14\ The Board proposed to eliminate this requirement and replace it
with a flexible standard that would require only that the target
delivery date allows the FICU to meet its requirement to obtain an
audit each calendar year.\15\
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\14\ 12 CFR 715.9(c)(6).
\15\ 12 CFR 715.4(a).
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Most commenters agreed with this proposed amendment because it
provides FICUs with additional flexibility. Further, these commenters
believed the amendment enhances a FICU's ability to better negotiate
the target date for delivery of written reports. Commenters further
stated that the proposal eliminates burden associated with seeking
waivers of the deadline from the NCUA. One commenter opposed the
proposal, stating the 120-day requirement may ensure uniformity
throughout the industry.
The Board has determined that it is appropriate to adopt this
change as proposed. The Board believes that this amendment will provide
enhanced flexibility and potential cost savings, without any adverse
impact to the auditing process. Although audit due dates may now vary
across the industry, the regulation will continue to require annual
audits, which provides substantial uniformity.
E. Applicability of Part 715
A few commenters addressed how part 715 should apply to FICUs, both
in terms of asset size and chartering authority. Because the Board did
not propose any changes in these areas, it declines to adopt the
commenters' recommendations, as discussed below.
The Board received two comments suggesting a lower asset-size
threshold for a financial statement audit. Because the FCU Act
establishes this threshold, as discussed above, and this matter is
beyond the scope of the proposal, the Board will not adopt this change.
One commenter stated that the NCUA should clarify part 715's
applicability to federally insured, state chartered credit unions
(FISCUs), observing that not all FISCUs have supervisory committees.
The commenter suggested re-organizing part 715 or amending Part 741 to
more clearly identify which requirements apply to FISCUs generally, and
in particular to those without supervisory committees. Because the
Board proposed no changes on this subject, it will not amend part 715
or 741 in this manner in this final rule. However, the Board notes that
the definition of ``supervisory committee'' in Sec. 715.2(l) expressly
addresses this issue as follows: ``Supervisory committee refers to a
supervisory committee as defined by section 111(b) of the Federal
Credit Union Act, 12 U.S.C. 1761(b). For some FISCUs, the `audit
committee' designated by state statute or regulation is the equivalent
of a supervisory committee.'' \16\ If state law or regulation does not
require FISCUs chartered in the state to have a supervisory committee
or an audit committee, then the credit union's board of directors is
responsible for the requirements attributed to the supervisory
committee in this regulation.
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\16\ 12 CFR 715.2(l).
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[[Page 53307]]
F. Conforming Amendments
As proposed, the Board is amending Sec. 715.9(c)(3), (d), and (e)
to replace references to the Supervisory Committee Guide with
references to the appendix.
V. Regulatory Procedures
A. Regulatory Flexibility Act
The Regulatory Flexibility Act requires NCUA to prepare an analysis
of any significant economic impact a regulation may have on a
substantial number of small entities (those with less than $100 million
in assets).\17\ This rule will provide relief to small credit unions by
clarifying and simplifying requirements related to supervisory
committee audits. Accordingly, NCUA certifies the rule will not have a
significant economic impact on a substantial number of small credit
unions.
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\17\ 5 U.S.C. 603(a).
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B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3501 et seq.)
requires that the Office of Management and Budget (OMB) approve of all
collections of information by a Federal agency from the public before
they can be implemented. Respondents are not required to respond to any
collection of information unless it displays a current, valid OMB
control number.
The information collection burden previously associated with the
internal controls and balance sheet audit options are now collected as
a single information collection associated with amended Sec. 715.7.
This change will be reflected in an upcoming renewal.
The information collection requirements under the current rule are
covered under OMB #3133-0059. This final rule does not contain any
additional information collection requirements under the Paperwork
Reduction Act.\18\
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\18\ 44 U.S.C. 3501.
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C. Executive Order 13132
Executive Order 13132 encourages independent regulatory agencies to
consider the impact of their actions on state and local interests.
NCUA, an independent regulatory agency as defined in 44 U.S.C. 3502(5),
voluntarily complies with the executive order to adhere to fundamental
federalism principles. The final rule does not have substantial direct
effects on the states, on the relationship between the national
government and the states, or on the distribution of power and
responsibilities among the various levels of government. NCUA has,
therefore, determined that this rule does not constitute a policy that
has federalism implications for purposes of the executive order.
D. Assessment of Federal Regulations and Policies on Families
NCUA has determined that this rule will not affect family well-
being within the meaning of Sec. 654 of the Treasury and General
Government Appropriations Act, 1999, Public Law 105-277, 112 Stat. 2681
(1998).
E. Small Business Regulatory Enforcement Fairness Act
The Small Business Regulatory Enforcement Fairness Act of 1996
(Pub. L. 104-121) (SBREFA) generally provides for congressional review
of agency rules.\19\ A reporting requirement is triggered in instances
where the NCUA issues a final rule as defined by Section 551 of the
Administrative Procedure Act.\20\ An agency rule, in addition to being
subject to congressional oversight, may also be subject to a delayed
effective date if the rule is a ``major rule.'' \21\ The NCUA does not
believe this rule is a ``major rule'' within the meaning of the
relevant sections of SBREFA. As required by SBREFA, the NCUA submitted
this final rule to OMB for it to determine if the final rule is a
``major rule'' for purposes of SBREFA. OMB determined that the final
rule is not major. The NCUA also will file appropriate reports with
Congress and the Government Accountability Office so this rule may be
reviewed.
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\19\ 5 U.S.C. 801-804.
\20\ 5 U.S.C. 551.
\21\ 5 U.S.C. 804(2).
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List of Subjects in 12 CFR Part 715
Credit unions, Reporting and recordkeeping requirements.
By the National Credit Union Administration Board on September
19, 2019.
Gerard Poliquin,
Secretary of the Board.
For the reasons discussed above, the National Credit Union
Administration Board amends 12 CFR part 715 as follows:
PART 715--SUPERVISORY COMMITTEE AUDITS AND VERIFICATIONS
0
1. The authority citation for part 715 continues to read as follows:
Authority: 12 U.S.C. 1761(b), 1761d, and 1782(a)(6).
Sec. 715.2 [Amended]
0
2. Amend Sec. 715.2 by removing and reserving paragraph (a) and (j).
0
3. Amend Sec. 715.4 by revising paragraph (b) and the table and
footnote 1 following paragraph (c) to read as follows:
Sec. 715.4 Audit responsibility of the Supervisory Committee.
* * * * *
(b) Financial statement audit option. Any federally-insured credit
union, whether Federal or State chartered and regardless of asset size,
may choose to fulfill its Supervisory Committee audit responsibility by
obtaining an annual audit of its financial statements performed in
accordance with GAAS by an independent person who is licensed to do so
by the State or jurisdiction in which the credit union is principally
located. (A ``financial statement audit'' is distinct from a
``supervisory committee audit,'' although a financial statement audit
is included among the options for fulfilling the supervisory committee
audit requirement in this section. Compare Sec. 715.2(c).)
* * * * *
Table 1 to Sec. 715.4
----------------------------------------------------------------------------------------------------------------
Minimum audit required to
Type of charter Asset size fulfill supervisory committee Part 715
audit responsibility \1\ section
----------------------------------------------------------------------------------------------------------------
Federal Charter....................... $500 Million or more..... Financial statement audit per 715.5
GAAS by independent, State-
licensed person.
Less than $500 Million Either financial statement
but greater than $10 audit or other supervisory
Million. committee audit.
$10 Million or less...... Supervisory committee audit.
State Charter......................... $500 Million or more..... Financial statement audit per 715.6
GAAS by independent, State
licensed person.
[[Page 53308]]
Less than $500 Million... Supervisory committee audit
unless audit prescribed by
State law is more stringent.
----------------------------------------------------------------------------------------------------------------
\1\ The Supervisory Committee audit responsibility under this part can always be fulfilled by obtaining a
financial statement audit. See paragraph (b) of this section.
0
4. Revise Sec. 715.7 to read as follows:
Sec. 715.7 Supervisory Committee audit alternatives to a financial
statement audit.
A credit union which is not required to obtain a financial
statement audit may fulfill its supervisory committee responsibility by
obtaining an Other Supervisory Committee Audit. Such an audit is one
that is performed by the supervisory committee, its internal auditor,
or any other qualified person (such as a certified public accountant,
public accountant, league auditor, credit union auditor consultant,
retired financial institutions examiner, etc.) that satisfies the
minimum requirements in appendix A of this part. Qualified persons who
are not State-licensed cannot provide assurance services under this
section.
0
5. Revise Sec. 715.9(c)(3) and (6), (d), and (e) to read as follows:
Sec. 715.9 Assistance from outside, compensated person.
* * * * *
(c) * * *
(3) If an Other Supervisory Committee Audit, include an appendix
setting forth the procedures to be performed;
* * * * *
(6) Specify a target date of delivery of the written reports, so
that such target date will enable the credit union to meet its annual
audit requirements in this part;
* * * * *
(d) Complete scope. If the engagement is to perform an Other
Supervisory Committee Audit intended to fully meet the requirements of
Sec. 715.7, the engagement letter shall certify that the audit will
address at least the minimum requirements in appendix A of this part.
(e) Exclusions from scope. If the engagement is to perform an Other
Supervisory Committee Audit which will exclude any of the minimum
requirements in appendix A of this part, the engagement letter shall:
(1) Identify the excluded items;
(2) State that, because of the exclusion(s), the resulting audit
will not, by itself, fulfill the scope of a supervisory committee
audit; and
(3) Caution that the supervisory committee will remain responsible
for fulfilling the scope of a supervisory committee audit with respect
to the excluded items.
0
6. Add appendix A to part 715 to read as follows:
Appendix A to Part 715--Supervisory Committee Audit--Minimum Procedures
This appendix presents minimum procedures which a supervisory
committee, its internal auditor, or other qualified person must
complete when a credit union chooses the Other Supervisory Committee
Audit option for completing its annual audit requirements under
Sec. 715.7.
This option may not be adequate for all credit unions as it is
designed for smaller, less complex credit unions. The supervisory
committee, internal auditor, or other qualified person may also need
to perform additional procedures to supplement these minimum
procedures if the specific circumstances of a particular credit
union so dictate. The supervisory committee must apply its judgment
in determining the procedures necessary to meet audit requirements
in this part. The supervisory committee remains responsible to
ensure that a complete set of test procedures is performed. All test
procedures will be done using balances and samples for the
applicable audit period under review.
Any time the test or confirmation procedures include making a
sample or selection, the supervisory committee's report, its
internal auditor's report, or other qualified person's report on
minimum procedures should describe the method of selection and the
number of selected items.
For purposes of this appendix, the following definitions will
apply:
Confirm or confirmation refers to a written
verification with a third-party (person or organization) pertaining
to an account balance or condition. Examples of confirmation letters
are bank/corporate credit union account confirmation, investment
account confirmation, borrowing or line of credit confirmation,
attorney letter confirmation, and member share/loan account
confirmation.
Materiality refers to a statement, fact or item, which,
giving full consideration to the surrounding circumstances as they
exist at the time, it is of such a nature that its disclosure, or
the method of treating it, would be likely to influence or to make a
difference in the judgment and conduct of a reasonable person.
Materiality should take into account ending balances as well as the
volume of transactions in an account. Typically, balances or
transaction volume greater than 5 percent of the credit union's net
worth should be considered material for purposes of this appendix.
Review refers to the examination of Board minutes,
policies and procedures, and a review of a sample portion of
activities, rather than all of the activities.
Test refers to procedures applied to the individual
items that compose an account balance or class of transactions. The
tests involve confirmation, inspection, or observation procedures to
provide evidence about the recorded amount.
The supervisory committee, internal auditor, or other qualified
person must perform and document the following minimum procedures:
Review Board of Director minutes to determine whether there
are any material changes to the credit union's activities or
condition that are relevant to the areas to be reviewed in the audit
Test and confirm material asset and liability accounts
including, at a minimum:
[cir] Loans
[cir] Cash on deposit
[cir] Investments
[cir] Shares
[cir] Borrowings
Test material equity, income, and expense accounts
Test for unrecorded liabilities
Review key internal controls including, at a minimum:
[cir] Bank reconciliation procedures
[cir] Cash controls
[cir] Dormant account controls
[cir] Wire and ACH transfer controls
[cir] Loan approval and disbursement procedures
[cir] Controls over accounts of employees and officials
[cir] Other real estate owned
[cir] Foreclosed and repossessed assets
Test the mathematical accuracy of the allowance for loan
and lease loss account and ensure the methodology is properly
applied
Test loan delinquency and charge-offs
[FR Doc. 2019-20822 Filed 10-4-19; 8:45 am]
BILLING CODE 7535-01-P